Application of the American Real Flexible Switch Options Methodology A Generalized Approach

Zdeněk Zmeškal

Czech Journal of Economics and Finance (Finance a uver), 2008, vol. 58, issue 05-06, 261-275

Abstract: The paper deals with the inclusion of flexibility in financial decision-making under risk. It describes the application of the real options methodology with the possibility of sequential multinomial decision-making. The basic intention is to describe and apply a generalized approach and methodology of the flexibility modeling and valuation based on multiple choices and non-symmetrical switching costs under risk. The stochastic dynamic Bellman optimization principle is explained and applied. The optimization criterion of the present expected value is derived and used. Likewise, an option valuation approach based on replication strategy and risk-neutral probability is applied. An illustrative example of the application of the real multinomial flexible non-symmetrical switch options methodology is presented for three chosen modes. The option flexible values are computed. The usefulness, effectiveness, and suitability of applying the generalized flexibility model in company valuation and project evaluation is verified and confirmed. The significance of applying the generalized methodology in transition market economies is discussed and verified.

Keywords: financial options; real options; Discrete Binomial Model; pricing; stochastic dynamic Bellman Optimization Principle; switch options (search for similar items in EconPapers)
JEL-codes: C C53 C6 F2 F21 G1 G11 G15 G2 G21 (search for similar items in EconPapers)
Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:58:y:2008:i:5-6:p:261-275

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